The evolution of market economies has dramatically broadened the opportunities of consumers, workers, investors, and firms. The sheer variety of goods and services that are easily accessible (for a price) would be breathtaking to people living just a century ago. At the same time, the multitude of choices can be bewildering. Increasingly, taking best advantage of available opportunities places heavy demands on the ability of actors to make sensible choices. The rising complexity affects nearly all market decisions, from choices about food, whether consumed at home or in restaurants; to choices about clothing, electronic equipment, transportation, and housing; to choices about career pathways; and to choices about savings and investing.

Viewed in this light, the widening array of alternatives in the financial marketplace is part of the larger process operating in the economy as a whole. Nonetheless, financial decisions are particularly vexing to many of today's families and to many businesspeople as well. Perhaps the confusion has arisen because of the speed at which financial markets and new financial instruments have emerged, or because of the higher levels of sophistication and the longer time horizons required for sound financial decisions. Moreover, the added complexity is taking place just as households face increased responsibilities for financial decisions and for insuring their own financial well-being. As lengthening life spans are making retirement planning a higher priority, the shift from defined benefit to defined contribution pensions is increasing both the freedom and the responsibility of workers to make choices. The expanding availability of credit options is providing individuals with more capacity to invest in education and owneroccupied housing and to separate the timing of consumption from the timing of income. At the same time, bad decisions can mire households in debt and lead to much lower living standards than households would enjoy, had their financial decisions been more sensible.

For the new financial freedom to help most people, they must understand their choices and the likely implications of alternative choices. Unfortunately, many Americans have a weak grasp of basic personal finance principles. One survey covering overall financial concepts found that nearly two-thirds of American adults and high school students did not know that money loses its value in times of inflation (Jump$tart 2004). General attitudes toward spending and saving behavior are troubling as well. Results from the same survey revealed that only a quarter of Americans feel very well informed about managing household finances (Jump$tart 2004). Low-income families are especially vulnerable to misinformation.

What is lacking is not information (e.g., who is charging what for a mortgage?), but rather the ability to interpret the information (e.g., how well do alternative mortgage strategies fit my needs?). Many people even seem unable to recognize the future burden they will experience by borrowing at very high interest rates. Without knowing all of the circumstances of individual cases, it is difficult to determine how many people are making poor decisions. But, given the apparently weak financial knowledge of a large segment of the population, the high rates of consumer bankruptcy, and the large share of the population poorly prepared for retirement, there are reasons for concern.